Tarsadia Capital LLC is urging Sunstone Hotel Investors Inc. to find a buyer or liquidate its assets.
Tarsadia Capital, which manages investments for Newport Beach’s Tarsadia Group, owns a 3.4% stake in Sunstone.
“Sunstone’s current trajectory as a subscale lodging REIT is simply not tenable,” Managing Director Michael Ching said in a statement. “The Board needs immediate refreshment and must commence a robust strategic alternatives process to unlock value for shareholders.”
Ching added that Tarsadia has made these suggestions to the board previously with “no avail.”
“If the board desires to continue with the status quo, we are prepared to make the case for change directly to our fellow shareholders,” he said.
As of March, BlackRock Inc. has a 19% stake in Sunstone, The Vanguard Group holds 16% and State Street Corp. has 6.7%.
In the last five years, the shares have hovered around $10 each, hitting as low as almost $7 in 2020 during the pandemic and going above $13 in 2022. At press time, the shares traded at $9.66 with a $1.8 billion market cap (NYSE: SHO).
The letter asked Aliso Viejo-based Sunstone to act immediately based on the recent performance of the lodging REIT industry and the company’s own “shrinking portfolio” of hotel properties since its initial public offering in 2004.
The company’s current portfolio includes 14 properties comprised of about 7,000 rooms in California, Washington D.C., Hawaii, Oregon, Massachusetts, Texas, Florida and Louisiana, including Four Seasons Napa Valley, Hilton San Diego Bayfront and JW Marriott New Orleans. That’s down from 60 properties in 2005.
“Sunstone has been a public company for over 20 years and has been on a journey of shrinking into obsolescence,” Tarsadia wrote in the letter. “To maximize value for shareholders, it is essential that this board recognizes it is now time to realize the value of Sunstone’s portfolio before further value is destroyed.”
Tarsadia has a deep expertise in the hotel industry, tracing its roots to 1976 when BU Patel, with his sons Mike Patel and Tushar Patel bought a motel in Anaheim. Nowadays, the Tarsadia Group, a family-owned business based in Newport Center, has more than $2 billion in assets, including more than a dozen hotels and 28 portfolio companies.
Steps to Take Action
Tarsadia reported that REIT firms have achieved the worst 10-year total return compared to its peers in other sectors in the FTSE Nareit Real Estate Index, according to data from Bloomberg.
“The Lodging REIT sector also trades at one of the steepest discounts to its net-asset-value (NAV) among its peers, reflecting its lack of acceptance by public equity investors,” Tarsadia said in the letter.
The firm also highlighted Sunstone’s contribution to the “sector’s shrinking relevancy and abysmal returns.”
“Sunstone’s portfolio is subscale and undervalued by public market investors,” the letter said. “These factors—and the significant negative sentiment pressuring the Lodging REIT sector—have led to the persistent poor performance of the company’s stock.”
Sunstone’s top seven properties include Hilton San Diego, Wailea Marriott and Westin Washington DC.
“Currently, Sunstone’s top seven properties represent 85% of its total EBITDA, with the Hilton San Diego Bayfront—its largest hotel—contributing to 19% of its total EBITDA,” Tarsadia wrote.
